Fitch Solutions Country Risk & Industry Research has predicted that Malaysia’s overnight policy rate (OPR) will be reduced to 1.0% by the end of 2020 to spur the country’s economic recovery. If realised, this would see the reduction of yet another 100 basis points (bps) from the current OPR, which stands at 2.0%.
Fitch Solutions had previously forecasted that Bank Negara Malaysia (BNM) would reduce the OPR to 1.5% this year. However, it has adjusted the prediction in the face of the country’s ailing economy, which has been critically affected by the movement control order (MCO) enforced to combat the Covid-19 pandemic.
The research house also added that in spite of the gradual easing of the MCO restrictions now, there is unlikely to be an immediate recovery among local businesses. Additionally, the government has very limited fiscal space to further support the economy, which is made worse by low oil prices. As such, monetary easing is a vital step in resisting the economic headwinds due to Covid-19.
“We do not expect inflation to be a large obstacle to further monetary easing. While there are risks of supply chain disruptions causing a spike in food prices which could see inflation rise, the dim prospect for non-food price pressures arising particularly from a poor oil price outlook, is likely to keep overall inflation manageable,” added Fitch Solutions.
The research house also expects BNM to look into other forms of monetary easing as the central bank cannot afford to further reduce the OPR. This is especially so as both Fitch Solutions and BNM foresee dire conditions for the local and global economy in the coming months.
Two days ago, BNM had slashed the OPR by 50bps to bring the rate down from 2.5% to 2.0%. It was the third cut to be made this year, and was also the largest to be made in a decade. Prior to that, the central bank had already reduced the OPR by 25bps twice – once in January, from 3.0% to 2.75%, and again in March, to 2.5%.
Following the latest cut, banks across Malaysia are also updating their base rates (BR) and base lending rates (BLR) to reflect the new rate.